IHT Transfers of Value in Relation to Pension Funds

IHT Transfers of Value in Relation to Pension Funds

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Parry & Ors v HMRC [2014] UKFTT 419 (TC)

In Parry and others v HMRC [2014] UKFTT 419 (TC) (7 May 2014), the First-tier Tribunal (Tax Chamber) held that a transfer of funds to a personal pension plan was not a transfer of value for inheritance tax purposes. However, an omission to take lifetime benefits from a personal pension plan can be a transfer of value in, in particular if it can be shown that the pension holder wished to confer a gratuitous benefit on another party.

The Law

Section 2(1) of the Inheritance Tax Act 1984 (IHTA) provides that a chargeable transfer is a transfer of value which is made by an individual other than an exempt transfer.

It is important to remember that without a transfer of value, there cannot be a chargeable transfer and an inheritance tax charge. A “transfer of value” is defined by section 3 of the IHTA as:

“(1) …a transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer.

(2) …[not relevant]

(3) Where the value of a person’s estate is diminished, and the value –

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(b) of any settled property, other than settled property treated by s 49(1) below as property to which a person is beneficially entitled

is increased by the first-mentioned person’s omission to exercise a right, he shall be treated for the purposes of this section as having made a disposition at the time (or latest time) when he could have exercised the right, unless it is shown that the omission was not deliberate.”

A transfer may be a “disposition” within the meaning of section 3(1), but may not be a “transfer of value” if it falls within section 10. That section reads as follows:

“(1) A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer anygratuitous benefit on any person and either:-

(a) that it was made in a transaction at arm’s length between persons not connected with each other, or

(b) that it was such as might be expected to be made in a transaction at arm’s length between persons not connected with each other….

(3) In this section –

‘disposition’ includes anything treated as a disposition by virtue of s 3(3) above;‘transaction’ includes a series of transactions and any associated operations.”

The Background

Following an acrimonious divorce, Mrs Staveley (the deceased) received, as ancillary relief, her share of a company pension fund. Advice from an actuarial company, in light of the law at the time, was that the only option for her was to have her fund transferred into what was called a ‘s 32 buyout’ policy. While this would give her independence on choice of investments, any surplus on the fund would be returned to the company. The reality was that her pension fund was over-funded in respect of her level of salary. She was advised that she would have to wait 10 years before she could transfer the fund to a personal pension plan, the terms of which would enable the entire value of the fund to be paid to her estate or beneficiaries.

Mrs Staveley was keen to ensure that her ex-husband would not benefit from her pension fund upon her death. In July 2000, shortly after the conclusion of her divorce, Mrs Staveley transferred her fund of £571,715 from the company occupational pension scheme into a s 32 scheme. Correspondence from her at this time record that it was “absolutely unacceptable” to her that there was a possibility that her ex-husband or the company could benefit from her pension fund if she died.

In 2004, in light of legal changes expected to come into effect in 2006, Mrs Staveley was advised that she could transfer her fund into a personal pension plan after six years.

In December 2004, Mrs Staveley was diagnosed with ovarian cancer. While initially her treatment was successful, by 2006 her condition had deteriorated, the prognosis given by her doctors was dim and only palliative care was offered.

On 3 November 2006, Mrs Staveley applied for the s 32 policy funds to be transferred into an AXA personal pension plan, the terms of which would allow the entire fund to be paid to her estate or to other beneficiaries. The policy commenced on 9 November 2006. She nominated her two sons as the beneficiaries to receive the death benefits from the fund.

Mrs Staveley died on 18 December 2006, aged 56. She took no benefits from the policy prior to her death, and the pension fund monies were paid out to her sons without any charge to IHT.

HMRC eventually issued a first notice of determination as it considered that the transfer effected on 9 November 2006 of her s.32 policy funds into the personal pension plan was a chargeable transfer of value of £405,694, which came within the ambit of section 3(3) of the Inheritance Tax Act 1984. A second notice of determination was issued on the basis that the omission by Mrs Staveley to take any lifetime benefits under her personal pension plan, between the time it was created and her death six weeks later, was also a transfer of value under section 3(3), amounting to £302,498. HMRC argued that at least one of her motives was to preserve the value of her pension fund for the beneficiaries named in her will.

Mrs Staveley’s personal representatives appealed, contending that neither of the transfers were intended to confer a gratuitous benefit, so that s 10(3) of the IHTA applied. They contended that Mrs Staveley’s sole intention on transferring her pension funds from the s 32 policy to the personal pension plan was to cut out any risk that any part of the pension fund might be returned to her ex-husband.

They further contended, in relation to the omission to take pension benefits, that the omission was not a disposition. That contention was based on two grounds. Firstly, that the proper interpretation of section 3(3) was that the decrease in value of the deceased’s estate must be causally linked with the increase in value of the other person’s estate. Secondly, it was argued that the omission was not deliberate.

The Decision

The First-Tier Tribunal (Judge Barbara Mosedale and Mr Ian Menzies-Conacher) held that Mrs Staveley’s transfer of her s 32 policy funds to a personal pension plan, while terminally ill, was not intended to confer any new benefit upon the beneficiaries named in her will. It was therefore not a transfer of value under section 3(1) because it was not intended “to confer any gratuitous benefit on any person” within the meaning of s.10.

However, in omitting to take lifetime benefits from the personal pension scheme, it was held that Mrs Staveley had made a transfer of value under section 3(3) because at least one of her motives was to preserve the value of her pension fund for the beneficiaries named in her will. It was therefore a chargeable transfer.

Although the Tribunal accepted that the decrease in value of Mrs Staveley’s estate did not occur at the same time as the increase in value of her sons’ estates, it held that section 3(3) did not require the increase and decrease to occur at the same moment.

In so deciding, the Tribunal considered the principles laid down by Judge Clark in Fryer & Others (Arnold’s Personal Representatives) v HMRC, [2010] SFTD 632. The Tribunal observed that there was nothing on the face of s 3(3) which requires the change in values of the two estates to be in the same amount and to occur at exactly the same time. There was no reason to think that Parliament intended such limitations to be read in. If such limitations were read in, it would allow money to escape the tax net on technical grounds without logical justification.